The UK Rental Market: Trends and Predictions

Demand for rented homes was high throughout 2022. Things went ballistic in the final months, after the unexpected mortgage rate rises forced many would-be First Time Buyers to put their purchase plans on ice for a while and extend their time in the private rented sector (PRS).

Of course, the PRS has suffered from a lack of supply for years. Figures published by HMRC in November indicated that at least 50,000 of the UK’s 2.1 million private landlords had exited the sector since 2019.

According to the National Residential Landlords Association, there are three main reasons for landlords adjusting their portfolio. These are:

1. Increasing landlord costs
2. Changes in regulation
3. Changes in tax

And there are plenty of examples across all 3 categories worrying landlords at the moment including the proposals contained in the Renters’ Reform Bill, tougher energy efficiency regulation in the pipeline and the additional tax burdens on landlords announced by Chancellor Jeremy Hunt in his Autumn Statement (reductions in Capital Gains Tax thresholds, limitations on Stamp Duty changes and the freeze on income and personal tax allowances).

Nevertheless, there are signs that the imbalance of supply against demand is beginning to level out.

According to Tom Bill, head of UK Residential Research at Knight Frank, there are clear indications that there are signs that supply in the lettings market is beginning to increase.

He suggests that the frustrations experienced by UK tenants at the scarcity of rental homes and the resultant increases in prices, has been mirrored around the world as universities re-opened post-Covid and demand surged.

Upward pressure

Bill believes that the problem was exacerbated in the UK by a strong sales market and low borrowing costs.

But as the sales market slows because of higher interest rates and fears of a pending recession, the upward pressure on cost of living is beginning to relent and available stock is now rising.

As a result, England and Wales enjoyed a 15% increase in lettings listed between December, 2021 and December, 2022.

Obviously, the research highlights significant regional differences, but in conclusion, Bill asserts that the days of 20% growth in rental values appear to be coming to an end.

Nevertheless, rental yields on residential property are set to remain buoyant in 2023, although the cost of living is likely to place continued strains on profitability as labour costs and the cost of materials are likely to continue rising throughout the year.

Average rental yields in the UK are, according to PropertyData, around 4.75% - but it is worth noting that 2022 experienced higher yields than usual in the rental market because of the high levels of demand.

Three of the country’s top postcodes for yields are in the North – BD1 (Bradford), 10.6%; M14 (Manchester), 10.1%; NE6 (Newcastle Upon Tyne), 9.8%. But PropertyData found the highest yield at NG7 (Nottingham), at 11.3% or more.

Finally, there have been a number of reports claiming a variety of hefty rent increases in the PRS during 2022.

As reported by Letting Agent Today, PRS rents across the UK rose by an average of 4.2% in the last year – 4.1% in England, 4.4% in Scotland and 3.5% in Wales.

However, official figures released by the Government this month indicate that actual rises may have been much lower than some of those other reports have claimed.